Unlock the secrets to refinancing for debt consolidation

Debt across multiple accounts can chip away at your monthly cashflow without you realising how much you're actually paying in interest.

Refinancing your home loan to consolidate debt rolls those high-interest personal loans, credit cards, and store accounts into your mortgage, typically at a lower interest rate. Instead of juggling five or six different repayment dates and interest charges, you make one monthly repayment at a rate that's often a fraction of what you were paying on unsecured debt. The monthly saving can be substantial, and the mental relief of simplifying your finances is immediate.

How refinancing to consolidate debt works

You're borrowing against the equity in your property to pay out higher-interest debts, then repaying that amount as part of your mortgage.

Consider a homeowner in Mentone with $40,000 spread across two credit cards and a personal loan. The credit cards are charging around 20% interest, the personal loan sits at 12%, and the minimum repayments across all three add up to roughly $1,800 a month. By refinancing their mortgage and increasing the loan amount by $40,000, they consolidate those debts into a home loan at a variable interest rate closer to 6%. The monthly repayment on that additional $40,000 might be around $600, depending on the loan term. That's a monthly saving of $1,200, which can be redirected into the mortgage, an offset account, or other financial priorities.

The key is making sure you actually close those credit accounts after consolidation. Leaving them open creates the temptation to run up new debt, and you end up with both the consolidated mortgage and fresh credit card balances.

When does debt consolidation through refinancing make sense?

It makes sense when the interest you're paying on unsecured debt is significantly higher than your mortgage rate, and when you have enough equity in your property to absorb the additional borrowing.

Most lenders will allow you to borrow up to 80% of your property's value without needing to pay lenders mortgage insurance. If your home is worth $900,000 and your current mortgage is $500,000, you've got access to around $220,000 in usable equity before hitting that 80% threshold. That gives you room to consolidate debt and still maintain a comfortable loan-to-value ratio. If you're already sitting above 80%, you can still refinance to consolidate debt, but you may need to factor in the cost of lenders mortgage insurance, which reduces the financial benefit.

Debt consolidation works when you're committed to changing the spending habits that created the debt in the first place. If you roll $30,000 of credit card debt into your mortgage but continue spending beyond your means, you'll end up in a worse position than when you started. In our experience, the clients who benefit most from this strategy are the ones who treat it as a reset, not a temporary fix.

What happens to your loan term when you consolidate debt?

The additional amount you borrow gets added to your existing mortgage and repaid over the remaining loan term, unless you adjust the term when you refinance your home loan.

If you have 22 years left on your mortgage and you consolidate $35,000 of debt without changing the loan term, that $35,000 gets spread across those 22 years. You'll pay less interest than you would have on the credit cards, but you'll be paying it for longer. The total interest cost on that $35,000 over 22 years will still be lower than paying it off over five or ten years at credit card rates, but it's worth running the numbers before committing.

Some borrowers choose to shorten the loan term slightly or increase their monthly repayments to clear the consolidated debt faster. If your monthly cashflow improves by $1,000 after consolidation, putting even half of that saving back into your mortgage can reduce the total interest you pay and bring your loan term back in line with your original plan.

How lenders assess your refinance application for debt consolidation

Lenders look at your total debt position, your income, your credit history, and the amount of equity you're accessing.

They calculate your borrowing capacity based on your current income and expenses, including the debts you're planning to consolidate. If you're carrying high credit card limits, lenders often assume you could max them out again, even if you plan to close the accounts. Some lenders will assess your capacity based on the actual balances you're consolidating, while others look at the total available credit. That difference can affect how much you're approved to borrow.

Your credit file will show any missed payments, defaults, or credit enquiries from the past few years. If your debt has been managed responsibly despite being spread across multiple accounts, that works in your favour. If there are late payments or defaults, it doesn't automatically disqualify you, but it may limit which lenders are willing to approve your application or affect the interest rate you're offered.

Refinancing to consolidate debt in Bayside's property market

Property values across the Bayside area have held firm, which means many homeowners sitting in suburbs like Brighton, Sandringham, Black Rock, and Beaumaris have built up significant equity without realising it.

A property purchased in Hampton East a decade ago for $700,000 might now be valued closer to $1.1 million or more, depending on the street and property type. If the mortgage has been paid down to $450,000, that creates substantial equity that can be used for debt consolidation without pushing the loan-to-value ratio into uncomfortable territory. The same principle applies in Cheltenham and Highett, where steady capital growth has given long-term owners access to equity they didn't have a few years ago.

Using that equity to clear high-interest debt and improve monthly cashflow is one of the most practical ways to make your property work for you, rather than just sitting on paper wealth while paying 18% interest on a credit card.

The cost of refinancing compared to the cost of staying in debt

Refinancing involves some upfront costs, including application fees, valuation fees, and potentially discharge fees from your current lender, but those costs are almost always outweighed by the interest you save.

A typical refinance might cost between $1,000 and $2,000 in fees, depending on the lender and whether you're charged for a property valuation. If you're consolidating $50,000 of debt that's costing you $15,000 a year in interest and repayments, and you can reduce that annual cost to $4,000 by rolling it into your mortgage, the upfront cost is recovered in a matter of weeks. After that, every month you're keeping more money in your offset account or using it to pay down the mortgage faster.

Staying in high-interest debt because you're worried about refinance fees is like avoiding the dentist because you don't want to pay for a check-up. The longer you leave it, the more it costs.

Call one of our team or book an appointment at a time that works for you. A loan health check takes around 20 minutes and gives you a clear picture of whether refinancing to consolidate debt will genuinely improve your position, or whether there's a different strategy that fits your circumstances.

Frequently Asked Questions